How does Uniswap work?

The operation of Uniswap focuses on two points: first, to provide a decentralized means of exchange (DEX) to its users, and secondly, to provide a means to create an automated liquidity protocol (AMM).

In the first case, Uniswap works like the exchanges we are used to using. In other words, we ask for a change from one currency to another, and this change is made by the platform, in this case in a completely decentralized way. The positive thing about Uniwap at this stage is that the control of funds is always in the hands of the user (similar to the 0x protocol), and the second thing is that due to the platform’s large user base and liquidity providers (LP), there is always a quick response for exchanges.

However, in this second aspect, there is a significant change from other AMM platforms, namely that Uniwap operates under a design called Constant Product Market Content (CMM). This business model creates liquidity reserves (or liquidity pools) with which traders can quickly trade (uniswap price prediction 2030).

Yes, we are talking about liquidity pools that are maintained by users who wish to assume this role, who are encouraged to invest in these pools in order to obtain commissions for their participation in them. This has made Uniwap an interesting platform for users, because liquidity injection means more profits, and has given rise to another phenomenon, liquidity extraction or liquidity mining.

Creating markets and profits

The objective of this operation is clear: to create large pools of criptomonedas ready for exchange and, consequently, to generate profits for liquidity providers and the platform itself. In addition, these pools are configured in such a way that liquidity providers must deposit tokens there. Normally, these tokens are ETH or an ERC-20 supported platform token, including stablecoins. The idea is to create a balanced liquidity system that allows the creation of trading options that interest liquidity providers and users of the platform.

For example, if liquidity providers create an ICD / ETH pool, they must enter a value in ETH and DAI. Once the pool is created, it will appear listed in Uniswap and users will be able to request exchanges there.

For example: if Maria wants to exchange her 100 DAI for ETH, she will only have to go to the DAI / ETH pool, make an exchange request and wait for it to be processed. The result is that the DAI / ETH pool will take 100 DAI from Maria and send her $100 in ETH. In the end, this change will be reflected in the liquidity of the ETH / DAI pool, since it has gained 100 DAI and lost $100 in ETH (grt price prediction).

Price control system and pool creation

However, in Uniswap, it is important to take into account certain situations. To list any token in Uniswap simply create an exchange pair with its respective pool and add cash. Thus, for example, we may be able to create our $ MONEY token (it is a fictitious token) and list it in Uniswap by creating a $ MONEY / ETH pool. At this point, we must add liquidity, which in this case could be $20 in the $ MONEY token and $20 in ETH. With this, we will have created a pool ready to work in Uniswap.

Generate pool tokens

Another important point in the operation of Uniswap is the generation of token pools. First of all, you must keep in mind that every time new tokens are injected into a Uniswap liquidity pool, the liquidity provider (LP) receives a “pool token” which is also, in turn, an ERC-20 token.

This means that token pools are created every time funds are deposited in the liquidity pool and, as ERC-20 tokens, token pools can be freely exchanged, moved and used in other dApps. When funds are recovered, pool tokens are burned or destroyed.